Rockwell Automation, Inc. (ROK) Earnings Call Transcript & Summary

Perfect. Well, I think we're ready to begin. My name is Julian Mitchell. Thanks, everyone, for joining us for the 38th Barclays Industrial Select Conference. It's my pleasure to introduce now Blake Moret, Chairman and CEO of Rockwell Automation; and also a breaking announcement regarding Nick Gangestad, new CFO. Many of you dialed in will know Nick from his long career at 3M. So congratulations, first of all. And thanks, Nick, for making yourself available this morning. I think even 12, 13 days before your first day at Rockwell. So congratulations to both, you and Blake, and we'll look forward to working with you at Rockwell. Perhaps, Blake, first off, if you just like to open up with any prepared remarks, and then we can obviously go into the Q&A session.

Great, Julian. Well, thank you. It's a pleasure to be here today. For those of you who may not be as familiar with the name, Rockwell is a pure-play industrial technology company, bringing the Connected Enterprise to life for customers around the world in discrete and hybrid and process industry segments. We're increasing our value by helping them become more resilient, agile and sustainable as IT and OT converge, and we're really helping to take manufacturing to a whole new level.

Thank you, Blake. And perhaps that first point around the company is more of a technology company today than it had been with its industrial roots. Maybe help us understand how satisfied you are with Rockwell's performance during this current downturn? And what sort of growth rates we should expect as you get that industrial recovery but also that technology layer perhaps driving some growth on top of that?

Well, we've talked for really the last couple of investor days about being more resilient in -- through the cycle and also giving ourselves more ways to win, more ways to add value. And I'm happy with early signs of that resilience coming out as we looked at -- even in the depths of this most recent downturn, I think our profitability held up quite well. We still have plenty of room to run in terms of increasing our revenue resilience and increasing our annual recurring revenue, which is a big focus for us now. But early signs are that the company is responding well, employees understand the importance of it, people recognize that it's all hands on deck, it's not just sales, it's not just the products and the software that we're developing, but it's the infrastructure, IT is in the game, and some of the recent hires that we've made are going to accelerate that process. So still early going, but I'm happy with the start.

Great. And then maybe just switching to Nick for a second. Nick, clearly, it's extremely early days for you at Rockwell, but maybe give us some understanding perhaps of the decision to join, the background for that? Any extremely early impressions of the new company?

Yes, Julian, thanks for asking that question. Yes, so I -- as you know, I retired last summer from 3M. And it was a long-term plan my wife and I had that we wanted to retire early when we could assess what do we want to do next with our life. And there are a number of things we're looking at. Late last year, this opportunity at Rockwell came up. And the more I explored it, I found the company with -- I knew well from my 3M days, but I found a company with a very exciting mission, very exciting vision. One that I've, as I learned more about it, like I could see myself becoming part of. As I talk to more and more people at Rockwell, I found people with a passion for what they're doing, and that's an exciting thing for me. And then while this company has been very successful, I found it also a company not willing to rest on its laurels, but also change to become even better and more impactful. So like, as an example, doing a lot of great things around industrial technology, but the layering on of software to make things even more simple for Rockwell's customers, like, that's an example of just a company wanting to get better and better. And I'm excited to be able to join this team and be part of this company.

Perfect. Thank you. And obviously, we'll circle back with much more rigorous questions once you've been in the job more than...

I have no doubt of that, Julian.

We'll look forward to seeing a lot more of you, Nick. I suppose, switching back to the near-term demand environment, I think, Blake, you've mentioned product orders showing good momentum late last calendar year. Maybe help us understand, has that continued into what you've seen so far of this year? And maybe I suppose there's some cross current short-term around maybe some component shortages, hurting demand or hurting the conversion of orders into revenue, but also the flip side is perhaps looming input costs causing some advanced purchases by customers or channel partners. Maybe just any clarity around those points on the near term?

Sure. Well, in our last earnings release, we continued with our practice through the pandemic of giving a little more visibility to orders on even a monthly basis in that -- the products part of our business because that's a leading indicator. And we showed that in November and December, in particular, we really saw a very strong uptick of orders. It contributed to the record backlog that we had at the end of our first fiscal quarter that ended in December, and that demand continued strong into the new quarter. We don't give inter-quarter guidance and so on, but we did say that the orders demand continued strong into end of January. This is -- products are around 2/3 of our business. Typically, the solutions, the engineer to order, the more people-intensive businesses, services and so on, that will tend to lag by a couple of quarters in different recessions. Each recession has had a different forcing function, if you will, but we generally see the demand for the longer cycle businesses, process systems, services and so on lagged by a couple of quarters. And I think there's indication that it's going to play out in a similar way here. We are working supply chain constraints like just about everybody in this industry to convert those orders to shipments. It's not affecting demand, but being able to convert that to shipments is, again, a hands-on process. We're working with distribution and our customers so that they understand. Our integrated supply chain folks are working to increase our own capacity as well as working with component suppliers there to make sure that we can maximize the impact there. But it's not affecting the demand from our customers at this point, and so that's positive to see and bodes well for the rest of the year.

Fantastic. And maybe looking out beyond this current fiscal year, you mentioned just now, each downturn has its different nuances or characteristics. When you think about this next upturn, very early days and everyone has their own perspective, but Rockwell has seen, I guess, 3 downturns, if you like, the last sort of 12 years, a huge -- and an upturn. You had a huge bounce in 2010, sort of reacceleration in 2014, a moderate balance in 20-sort-of '17, '18. So how are you assessing like this sort of slop and shape of the upturn, not the next 6 months, but looking medium-term, what does it feel like to you? What does it remind you of or not remind you of?

Yes. I think taking a specific vertical by vertical approach to that assessment is probably helpful. Starting with discrete and a couple of the primary vertical industries within discrete segment, you look at automotive, and obviously, the big news is move towards electric vehicles, and we're seeing that. Some of the potential that we've been talking about for a while is turning into orders, and we have more ways to win in electric vehicles. In addition to all the traditional processes of stamping metal and painting it and the body shop and assembling things and testing the vehicle at the end of the line, all those things are still relevant in electric vehicles, but we have a much higher readiness to serve in the powertrain side because it's not so much so-called subtractive manufacturing processes, it's the assembly, our motion control, including our independent car technology, gives us a very high readiness to serve. And in addition to that, the software, the MES software for scheduling units in an electric vehicle plant, that's more of a necessary requirement in the eyes of those manufacturers today rather than a nice to have that may have been the case in traditional plans. So we see the secular trends of electric vehicles as well as our readiness to serve, attractive, and they bode well for the next few years there. Semiconductor, again, we have additional ways to win, brand moving from our traditional strengths in the building management there, and people are continuing to make everything they can smart. And so as we're seeing, the semi manufacturers are building capacity because they have to because they're at the critical path for so many industries today. Moving on to hybrid life sciences, people are going to continue to want to live longer, healthier lives. If we come into a new normal where the world is looking for 1 billion or 2 billion doses of vaccine or booster shots each year, that's a tremendous opportunity for an industry for us that we're very well-positioned to serve from our basic automation as well as the software. Food and beverage, as populations grow, people continue to want to eat. They want choices. And how that food is packaged as more people enter the middle class, then they have more choice in their diet. And food and beverage is our single biggest vertical, and I feel very good with the way we're positioned there. And then maybe finishing on the process side, oil and gas, the world is still using 90 million barrels of oil a day. What we're hearing more in the narrative is extracting that and producing it as efficiently as possible. And for sustainability reasons as well as just being able to lower the breakeven point, that's exactly where we're focused. It's not about new capacity for us, it's about more efficient production. And then mining, and as we've seen commodity prices increase, that's a good thing. It is a little bit of a headwind, of course, in terms of our internal cost, but it's outweighed by the opportunity to sell more to the copper mines as they look for more resilience in their operations, remote operations, safety, higher quality and efficiency. And those are all things that we're made to help them with.

Perfect. And within -- there's a lot of drivers out there across the different markets, customer spending as well as automation specific. When you think about Rockwell's own perspectives around market share in the short term, there's been some questions, I suppose, particularly after the last quarter, and I think it's -- everyone dialed in would agree, it's madness to extrapolate sort of market share trends and something like automation from 1 to 3 months period, but it is something we get questions around. What's your perspective on Rockwell's market shares, whether you want to talk about it sort of by segment or vertical or geographic region? Are you concerned in any way? Or you think the company is through a lot of these moves organically and inorganically, it's actually moving further ahead perhaps of the pack in some respects than it might have been 10 years ago?

Yes. Our overall position is one of offense versus defense. I think we have tremendous opportunities to take share in a variety of geographies, industries and then in segments of our offering. When we look at the way things have played out over the last year, our strongest market where we have the highest share is unquestionably North America. North America was really last into the pandemic, and I think it's playing out where North America is last out. So whereas in our second fiscal quarter last year, we outperformed a number of our competitors, and I am expecting, particularly with the development of orders that we've seen, that we're going to see very strong performance in the second half of the year as those orders convert to shipments, and we continue to have new orders. So I look at it as primarily an issue of calendarization. We have lower shares in China, I don't think that's a surprise, and China was first in and first out. So I would look at it that way. Now that being said, we don't rest on where we are for a moment, and we continue to look for every opportunity we can to beat our competitors and to take additional share around the world. And so it's going -- you're going to see an aggressive posture from us releasing new hardware and software offerings, adding new go-to-market options in parts of the world where we have lower share to complement our traditional electrical distributors. And so that's where we're positioned, and I like that point of our evolution.

Thanks. And one sort of related aspect there, you talked about going on the offense, and acquisition is part of that, but organically as well, I think we saw it in your most recent earnings call, there is some stepped up investment in the current fiscal year. I suppose some investors might ask, because of the changes in the automation industry, IT penetration on the rise, is there a chance of that higher investment spend, each year now, it's higher and higher or no, you think this is sort of not temporary, but it's an unusual step-up in the current year in that investment spend, and so we shouldn't assume every year now we get a big step-up?